Almost Entire Drop in 2009's Credit Card Balances Was Written Off Bad Debt

Thursday, March 11, 2010
Almost Entire Drop in 2009's Credit Card Balances Was Written Off Bad Debt, not Americans Paying Off Debt
Posted by TraderMark at 10:30 AM TweetThis

A fascinating story via AP, which shows how difficult it is to simply read the headline data and make a judgement. We see this happen every morning where assessments of data are made within seconds of the headline crossing, and billions of market capitalization adjusted accordingly.

Assumption based on the data from 2009: supposedly Americans are finally paying off some of their debt.

Reality: On a net net basis (while surely *some* Americans are paying off some debt) almost the entire total of "paid down" debt was simply banks finally writing off unpaid debts as never to be collected.

Now, the net result is the same... it does leave Americans with less debt (or if you are a cynic, it leaves Americans with more ability to re-run up their debt), but it showcases once more the trouble under the surface. And what was a quite promising data point does not look very much so once it was cross referenced with another set of figures. I expect the exact same thing is happening with mortgage debt as foreclosures, short sales, and defaults come to dominate.

With unemployment high and personal wealth diminished, how was it that strapped consumers were paying down their credit card debt last year? It turns out they probably weren't. The bulk of 2009's drop in credit card debt instead came because banks were forced to write off loans consumers failed to pay, according to an analysis of Federal Reserve data. Loans are typically charged off by banks once they're 180 days past due, under the assumption that the debt won't be repaid.
In 2009, banks wrote off a record $83.27 billion in credit card debt. A study by consumer credit research site CardHub.com found that accounts for the bulk of the of $93.2 billion drop in consumer card balances reported by the Fed for last year.
"If you just look at the numbers, you think, 'Oh my goodness, there was a big decrease in credit card debt,'" said Odysseas Papadimitriou, CEO and founder of CardHub.com. But Papadimitriou said it didn't add up that consumers could make such a big dent in debt while under the financial pressure Americans faced last year. (Don't be a buzz kill & tell CNBC about this unconvenient fact )
The Federal Reserve's reports on outstanding consumer loans don't tease out the amount charged off by banks. By that measure, credit card borrowing fell for 16 straight months through January, suggesting consumers have been chipping away at balances and spending less. When you consider how much banks are being forced to forsake in bad loans, however, consumers' ability to pay off balances doesn't appear as rosy.
The only time consumers truly paid down their debt was in the first quarter of last year, the CardHub.com study finds. During those three months, card balances fell by $46.9 billion, excluding the $17.59 billion banks wrote off. After that, card balances either remained steady or rose.
This is really no different as we sit here in awe that Americans can continue to spend at the mall, while ignoring the fact many are busy strategically defaulting on their mortgage [Feb 18, 2010: Jim Cramer has Lightbulb Moment - Not Paying Mortgages is Keeping Americans Spending] , not saving for retirement [Mar 9, 2010: Nearly Half of Americans Have Less than $10K for Retirement; a Quarter under $1K], and have the government handing them money at a rate not seen since the 1920s. [Jun 5, 2009: 1 in 6 Dollars of Income Now Via Government; Highest Since 1929] Look behind the headline data and you get a better sense of the situation.

I read a post on some board or an article somewhere that Chase and BAC are offering settlement amounts on delinquent accounts as low as $0.20 on the dollar.

Its a great deal for the guy with the delinquent balance because he can pay off his debt for such a small amount and it will get reported to the credit bureaus as "paid as agreed", and no charge-off will hit his credit report. However, he needs to somehow raise the cash right away and will face a tax bill the following year for the amount of debt that was forgiven.

In the end, the debt will get settled for way less than $0.50 on the dollar.

I read a post on some board or an article somewhere that Chase and BAC are offering settlement amounts on delinquent accounts as low as $0.20 on the dollar.

Its a great deal for the guy with the delinquent balance because he can pay off his debt for such a small amount and it will get reported to the credit bureaus as "paid as agreed", and no charge-off will hit his credit report. However, he needs to somehow raise the cash right away and will face a tax bill the following year for the amount of debt that was forgiven.

In the end, the debt will get settled for way less than $0.50 on the dollar.

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Sometimes it pays to be a deadbeat. What if you have no money to pay taxes on the amount of debt forgiven? Is it subject to federal, state, and social security taxes?

Its a great deal for the guy with the delinquent balance because he can pay off his debt for such a small amount and it will get reported to the credit bureaus as "paid as agreed", and no charge-off will hit his credit report.

More...

I was under the impression in a situation like this it would be reported on the credit report as being settled for less than the full balance. Ive always paid on time so I don't know but maybe people who have settled can elaborate.

I was under the impression in a situation like this it would be reported on the credit report as being settled for less than the full balance. Ive always paid on time so I don't know but maybe people who have settled can elaborate.

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I'm not positive. I have several apartment buildings so I've seen hundreds of credit reports. I've never seen a "settled for less than full balance" line.